From the March 17, 2009 Daily Telegraph
March 17, 2009
by Irwin Stelzer
I fear I hear the sound of babies being washed down the drain with the dirty bathwater. The economy is in a deep recession after a decade of greed, excess and ostentation, too much credit, too great an increase in inequality, too little regulation – name your poison, as New York bartenders in days gone by were wont to instruct patrons. So we have Lord Mandelson taking instruction from the French on how the government and private sectors ought to interact – from a country that consistently suffers from an unemployment rate far in excess of Britain's. And we have talk of the end of "light-touch regulation", to be replaced, I assume, by blows from a great clunking fist.
So let's pause and ask, first, whether we have correctly characterised the past decade or so. The Tories, of course, see the recent past as a mere "bubble", inflated by Gordon Brown's mistaken fiscal policies and willingness to condone an era of too-easy credit. Brown, in turn, characterises the past as an era of greed-fuelled excess by bankers intent on maximising their bonuses, the public be damned.
Those factors helped London to shoot to prominence, and will again. After all, the thousands of now-unemployed bankers, lawyers and entrepreneurs have not disappeared, but are merely seeking new outlets for their skills and energy. It is difficult to imagine that a talent pool of that quality and size will sink into the dependence on the state to which governments have reduced thousands in large swathes of the country.
Nor is it likely that a resurgent financial sector is all that Britain will have. Contrary to popular imagination, the manufacturing sector has grown in the past 50 years: think Rolls-Royce, BAe Systems, GlaxoSmithKline.
Then there are the institutional arrangements that contributed to Britain's growth. The political system is stable enough to have seen Clement Attlee establish a welfare state that corrected some
of the pre-Second World War inequities; Margaret Thatcher eliminate some of its excesses and restore a workable balance between the public and private sectors; Tony Blair restore the Labour Party as a credible Opposition; and David Cameron do the same for the Tories. All without a single shot fired, or cobblestone hurled, although it took strong action by prime minister Thatcher to prevent the miners from replacing the rule of law with the rule of the mob.
The rule of law is another reason to believe that prosperity, if not just around the corner, will return. Investors know that even a Left-wing Government is not going the route of Putin's Russia: direct confiscation is not a worry, although retroactive taxation and a less welcoming attitude towards foreigners are concerns.
Finally, there is regulation. Ignore the Sturm und Drang about bringing bankers to heel, and permanent nationalisation of the commanding heights of the financial system. The market will correct some of these problems: it is unlikely that shareholders will allow bankers to return to the system that produced huge bonuses for executives who broke companies they were charged with managing. And government will do the rest.
Sooner or later, Britain gets the mix of regulation and freedom to operate about right. True, there have been gaps in both the institutional arrangements and the implementation of the rules governing financial institutions. We've been there before. When Mrs Thatcher privatised the electric, gas and telecoms industries, it became necessary to regulate those monopolies. Initially, regulators found that they didn't have the power to extract the information they needed, and the old barons of the nationalised companies saw no need to pay the regulators much heed. But gradually, the regulatory system was improved, talented regulators emerged, and the monopolies were brought to heel. In the other sectors, then-Chancellor Gordon Brown led the charge to criminalise cartel behaviour, and strengthen the enforcement agency by attracting talented leaders. It sometimes takes a while, but somehow the British system, and politicians whose actions are tempered by the need to maintain support among the tax-paying business community, get it right. Not perfect, just right.
None of this is certain. It is possible that a hyperactive Government will take on so much debt; weave a choking web of regulation around the private sector; create an atmosphere conducive to class warfare; and expand the welfare state to such an extent that it must raise taxes to levels that discourage work and risk-taking. But it is more likely the electorate won't have it, and will install an Opposition aware that such policies might convert a temporary recession into secular stagnation. Feel better?
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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